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Long-Term Care: Another Time Bomb for the Economy

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Just a few weeks ago Richard Doelger opened a letter to find that the premiums on his long-term care insurance were set to jump 25 percent in November — that’s on top of a 25 percent increase last year. The increases will jack up his payments to $434 a month for the policy, which covers in-home, nursing home and other assistance if he becomes disabled.

Now Doelger, 76, fears that what began as an affordable rate 10 years ago could keep rising, forcing him to walk away from the $30,000 he has already invested. “This whole action borders on the criminal,” says Doelger, a retired marketing vice president in Shrewsbury, N.J. Like thousands of others in his state, he might get some help from Rep. Frank Pallone, D-N.J., who is probing such rate hikes and says he will seek to roll them back if they reflect gouging. (Full disclosure: My own long-term care premiums also have jumped.)

Doelger’s plight symbolizes an urgent but largely unheralded fiscal problem: the nation’s failure to lay the foundation for affordable long-term care insurance as 78 million baby boomers move into their senior years. Some 70 percent of Americans who reach 65 will eventually require help with daily activities like dressing and feeding themselves, according to studies, and 20 percent will require assistance for more than five years.

Long-Term Care: Who PaysAmericans must basically fend for themselves in figuring out how to meet these expenses, unlike folks in Japan and much of Europe, where government-managed long-term care insurance is affordable and mandatory. But those programs are being cut back severely as entitlements geared toward aging populations drain resources and increase national debt.

In this country, financing relies most heavily on the joint federal-state Medicaid program, which pays more than 40 percent of total long-term care spending, according to the Scan Foundation, and requires individuals to impoverish themselves to qualify.

“Medicaid spending for long-term careis projected to total more than$3.7 trillion from 2008 to 2028.”

Medicaid spending for long-term care is projected to total more than $3.7 trillion from 2008 to 2028, according to a report commissioned by America’s Health Insurance Plans, and to grow at a faster rate than both overall health care spending and the U.S. gross domestic product. And that surge in spending will only exacerbate state and federal budget woes. If current trends continue, more than 35 percent of states’ budgets will be needed for Medicaid by 2030, of which half will be for long-term care services, according to a recent Deloitte study called "Medicaid Long-Term Care: The Ticking Time Bomb"

At the same time, the Congressional Budget Office estimates that federal spending on Medicaid will triple from about $251 billion, or 1.8 percent of the U.S. gross domestic product in 2009, to almost 3 percent in 2035. Long-term care accounts for about one-third of all Medicaid spending.

While many people think that Medicare pays for long-term care, the federal health insurance program for seniors actually picks up less than 20 percent of the tab, mainly related to rehabilitation, at a cost of roughly $39 billion this year. Consumers pay roughly 30 percent out of pocket. The smallest proportion of long-term care spending, less than 10 percent, is covered by private insurance.

Companies say the recent rate hikes reflect unforeseen claims and falling investment income and were needed to ensure future solvency. Insurers acknowledge that actuaries missed the mark in estimating the number and length of claims for this relatively new insurance product.

The Public Option: Fiscal Fix or Budget Buster?The federal government now plans to deliver care insurance through a brave new public option that Congress tucked into the health care reform act. As with the overall law, this option has drawn fierce fire. Called CLASS, for Community Living Assistances and Supports, the opt-out program aims to provide affordable long-term care coverage to all U.S. workers 18 and older, including those with disabilities and pre-existing conditions.

CLASS participants will pay premiums through payroll deductions and become eligible within five years for benefits of at least $75 a day for care in their homes or other settings. Estimated average premium costs currently range from $123 to $240 a month. Enrollment will likely begin soon after the secretary of Health and Human Services sets final rules and premium rates, which are due by October 2112.

The CLASS Act is "a Ponzi scheme of thefirst order, the kind of thing that Bernie Madoff would have been proud of."

But critics contend that the program will mainly attract the people most likely to file claims, and this “adverse selection” will force up premiums and ultimately make CLASS insolvent and saddle taxpayers with a hefty bailout. “How many 18-year-olds are going to sign up to have money taken out of their paychecks to pay for long-term care insurance?” asks Jesse Slome, executive director of the American Association for Long-Term Care Insurance, an industry trade group. “They don’t buy this insurance now and they won’t buy CLASS either.”

Senator Kent Conrad, D-N.D., called the CLASS Act "a Ponzi scheme of the first order, the kind of thing that Bernie Madoff would have been proud of," and he vowed to block its inclusion in the Senate bill. Even some sympathizers are skeptical. A national insurance program for long-term care is “absolutely the right idea,” says Howard Gleckman a resident fellow at The Urban Institute. “But I don’t know how this gets done on a voluntary basis. The bottom line is that the insurance will be too expensive.”

Washington, D.C. attorney Elizabeth Priaulx has tried to prepare herself for large long-term care costs, but has so far been frustrated. Priaulx (pronounced Pree-oh), 41, suffers from cerebral palsy and arthritis and has been advised that she cannot buy private long-term care coverage at any price. “I’m going to pay into the program,” she says of CLASS. “I might never use the funds and that’s okay with me. This should be a program for people who believe in taking care of their futures.”

Proponents cite the CBO analysis, which says CLASS will remain solvent for at least 75 years. And they agree that attracting a broad range of enrollees will be vital. Budget experts at the Heritage Foundation disagree. They claim that because participants pay premiums for five years before receiving benefits there’s an illusion of deficit reduction at the onset. But by 2030, the program will add to the deficit.

A Three-Legged Solution: Savings Plus Private, Public InsuranceSo where does the country go from here to finance care? For starters, the debate over CLASS can get people thinking about long-term assistance, which typically calls up dark visions of nursing homes that no one likes to contemplate. But the topic of care is far broader. “A good way to think about this is in the context of retirement security,” says Harvard Medical School professor David Stevenson. He likens paying for care to financing retirement through the combination of a person’s pension, savings and Social Security checks.

When it comes to long-term care, this three-legged stool might consist of savings, private insurance and a government provided policy. “Nobody has ever made the case that CLASS addresses the entire issue for those who need long-term services and support,” says Howard Bedlin, vice-president for public policy and advocacy at the National Council on Aging. “It’s always been billed as the foundation around which coverage can be built.”

A possible model for this approach could be the current combination of public Medicare insurance and private Medigap policies that supplement it. Private long-term care insurers are already thinking about how to complement CLASS coverage. The trick will be to make such public-private packages affordable. “That’s the challenge we face,” says Bedlin, “and it’s a serious challenge.”

What to do? Many experts advocate a European-style solution that would hold down insurance costs by mandating universal coverage. But politically, that’s a nonstarter, and it no longer works for Europe as populations age and draw down dollars from the system. And no one’s in the mood for another massive government spending program. So, the next best way to solve the massive long-term care problem for both individuals and the government may be for consumers to prepare in advance for their long-term care needs, says The Urban Institute’s Howard Gleckman. For Americans, this comes down to some combination of increasing their personal savings and purchasing insurance. Such steps would ready individuals to pay for long-term care without bankrupting themselves should they need it, and would take the heat off the government if they do.